EU Integration Dead In The Water

BMI View : The collapse of historic Association Agreement talks between the EU and Ukraine points towards a path of long-term economic and political stagnation for Ukraine. While closer ties with Russia may be positive for near-term economic stability if a deal on cheaper gas can be struck, the odds of positive economic and political reform gaining momentum over the next few years will decline significantly.

Association Agreement talks between Ukraine and the EU collapsed abruptly on November 21, with Ukraine announcing it intends to pursue closer ties with Russia, despite its repeated insistence over the past few months that a deal with the EU was on the cards. In response to Ukraine's EU ambitions, Russia has repeatedly made threats of an all out trade war, which would likely have pushed Ukraine's already fragile economy into a full-blown economic crisis.

However, the EU has been relatively reluctant to put any money on the table - and we believe that this is the single most important factor underpinning the suspension of talks. It is increasingly apparent that despite recent diplomatic efforts, Ukraine is just not that valuable to the EU. While Ukraine's sharp diplomatic U-turn could be a final hard-ball tactic to push the EU into offering substantially more financing, momentum is fading rapidly, and EU diplomats appear to have given up hopes that the agreement will be signed at the Vilnius summit. If Ukraine does not sign the agreement in late November, the window of opportunity is unlikely to reappear for several years.

Short-Term Gain, Long-Term Pain
Ukraine - 5 Year Sovereign CDS, basis points

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This article is tagged to:
Sector: Country Risk
Geography: Ukraine, Russia

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